The Inflation Reduction Act: Key corporate tax provisions
What is the Inflation Reduction Act?
The Inflation Reduction Act (H.R.5376) is a climate and tax bill that advances elements of the administration’s economic agenda. President Biden signed the Inflation Reduction Act into law in August 2022.
The legislation includes provisions designed to prevent the largest corporations from exploiting tax loopholes that allow them to pay little or no federal income tax. It also includes new and extended tax credits designed to incentivize businesses and individuals to boost their use of renewable energy.
While additional guidance and regulations are expected in the coming months and years, here is a look at the key corporate tax provisions of the Inflation Reduction Act. Unless otherwise noted, all changes are effective beginning after December 31, 2022.
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Will the corporate minimum tax change?
The Inflation Reduction Act imposes a corporate alternative minimum tax equal to the excess of 15% of a corporation’s adjusted financial statement income (AFSI) over its corporate alternative minimum tax foreign tax credit.
What corporations does the corporate AMT apply to?
The AMT applies to C corporations that, for three taxable years, have an average annual AFSI greater than $1 billion (and at least $100 million for members of foreign-parented international financial reporting groups where the group has average annual AFSI greater than $1 billion).
AFSI is the net income or loss set forth on an applicable financial statement, with certain adjustments.
The act provides rules for calculating AFSI for certain entities and types of income (e.g., consolidated groups, foreign-parented groups, effectively connected income). AFSI is reduced by accelerated depreciation deductions.
The Joint Committee on Taxation estimates that only 150 companies will be subject to the minimum tax.
[Adam Schrom, CPA, director of product management at Bloomberg Tax, breaks down several aspects of the legislation and provides a history lesson in the process. Listen here: A closer look at tax items in the Inflation Reduction Act.]
Download: Inflation Reduction Act Roadmap
Stay up-to-date with changes for tax planning, specifically on the potential effects of corporate tax increases on job creation and investments.
How is excise tax on corporate stock buybacks affected by the Inflation Reduction Act?
The IRA imposes a 1% tax on the fair market value of stock repurchased by a publicly traded U.S. corporation during the taxable year.
The amount subject to this 1% tax is generally the amount paid by the issuing corporation during the year to shareholders in exchange for their issuing corporation stock, reduced by the value of any stock issuances during the taxable year.
The excise tax applies to IRC §317(b) redemptions, economically similar transactions, and stock acquired by a corporation’s specified affiliate from another person. It also applies to certain acquisitions and repurchases of publicly traded foreign corporation stock.
The 1% excise tax generally does not apply to:
- IRC §368 tax-free reorganizations
- Total repurchased stock of $1 million or less for the taxable year
- Repurchases treated as dividends
- Repurchases of stock that are contributed to employer-sponsored retirement plans, employee stock ownership plans, or similar plans
- Repurchases by regulated investment companies (RICs) or real estate investment trusts (REITs)
- Certain repurchases by a securities dealer in the ordinary course of business
This OnPoint report illustrates the challenges that state and local tax practitioners face in a rapidly evolving local tax landscape.
What is the Inflation Reduction Act’s impact on Superfund excise tax on hazardous substances?
Beginning in 2023, the Inflation Reduction Act permanently reinstates the hazardous substance Superfund excise taxes on domestic crude oil and imported petroleum products at a rate of 16.4 cents per gallon (adjusted for inflation annually thereafter).
When the Superfund excise taxes previously expired in December 1995, the rate was 9.7 cents per barrel. The Infrastructure Investment and Jobs Act in 2021 separately renewed certain excise taxes that became effective on July 1, 2022.
Revenues from this excise tax finance the Hazardous Substance Superfund Trust Fund through 2032.
The signing of the Inflation Reduction Act kicked-off the monumental task of writing new rules to implement its clean energy tax credits and environmental mandates.
Energy-related tax credits
A significant portion of the Inflation Reduction Act is devoted to incentives for green energy, including tax credits.
In some cases, the tax credits are extensions or expansions of existing credits. However, the IRA also creates new tax credits for businesses and individuals.
Research Credit Against Payroll for Small Businesses
The IRA increases from $250,000 to $500,000, the limit on the amount of research credit that qualified small businesses may elect to treat as a credit against their payroll tax liability.
Restoration and extension of the renewable electricity production tax credit (PTC) and the investment tax credit (ITC)
The act extends the PTC for renewable energy projects that begin construction through the end of 2024.
Facilities that pay prevailing wages during construction and for the first decade of operation, and fulfill apprenticeship requirements, can qualify for up to five times the base amount of the credit. Increased credit amounts apply to domestic content, energy communities, and hydropower facilities placed in service after 2022.
It also extends to the end of 2024 the election to treat certain facilities that otherwise qualify for the IRC §45 PTC (“qualified investment credit facilities”) as energy property qualified for the IRC §48 ITC instead.
The IRA extends for one year, through the end of 2024, the beginning-of-construction deadline for some types of energy property (for example, qualified fuel cell property) to qualify for the ITC. It also extends the beginning-of-construction deadline for geothermal equipment through the end of 2034.
The base energy credit rate is reduced unless wage and apprenticeship requirements are met. The Act also allows the credit for new types of energy property, including energy storage technology, qualified biogas, and microgrid controller property.
Beginning in 2023, the IRA expands the ITC to include certain qualified solar and wind facilities. To qualify, a facility must have a maximum net output of less than 5 megawatts and must be located in low-income communities, on American Indian land, or as part of a low-income residential building project or low-income economic benefit project.
Business credit for commercial clean vehicles
The Inflation Reduction Act provides a new business credit for qualified commercial clean vehicles in an amount equal to the lesser of:
- 15% (or 30% for a vehicle not powered by a gas or diesel internal combustion engine) of basis, or
- the incremental cost of the vehicle (excess of the purchase price of such vehicle over the purchase price of a comparable vehicle).
The credit is worth a maximum of $7,500, or $40,000 for a vehicle with a gross vehicle weight rating of at least 14,000 pounds.
The credit is set to expire after 2032.
[Download the Inflation Reduction Act Roadmap for a full explanation of corporate tax credits.]
Clean electricity production credit
The IRA creates a new business credit for producing clean electricity for facilities placed in service after 2024, where the greenhouse gas emissions rate is not greater than zero.
The credit equals the kilowatt hours of electricity produced and sold, multiplied by a base amount of 0.3 cents or 1.5 cents (adjusted for inflation).
Increased credit amounts are available if certain wage and apprenticeship requirements are met. The credit begins to phase out one year after the latter of 2032, or the year when annual greenhouse gas emissions from U.S. electricity production are equal to or less than 25% of the emission rate for 2022.
Clean fuel production credit
The IRA creates a new business credit for clean fuel that a business produces at a qualifying facility and sells for qualifying purposes.
The fuel must meet certain emissions standards. The credit per gallon base amounts are:
- $0.20 (non-aviation fuel)
- $0.35 (aviation fuel)
Increases are available if the business meets prevailing wage and apprenticeship requirements. All amounts are adjusted for inflation.
The credit applies to clean fuel produced after 2024 and sold before 2028.
Clean electricity investment credit
The IRA creates a new investment credit for clean electricity property investments in energy storage technology and qualified facilities placed in service after 2024, where the greenhouse gas emissions rate is not greater than zero.
The base credit rate is 6% of the qualified investment, with increases available if specific requirements related to construction date, output, and wages, among other factors, are met.
The credit begins to phase out one year after the latter of 2032, or the year when annual greenhouse gas emissions from U.S. electricity production are equal to or less than 25% of the emission rate for 2022.
Extension and modification of alternative fuel vehicle refueling property credit
The IRA extends the alternative fuel vehicle refueling property credit through 2032 and lowers the credit rate from 30% to 6% if the refueling property is depreciable.
It also increases the credit limit to $100,000 per item of depreciable refueling property and $1,000 per item of non-depreciable refueling property. Bidirectional charging equipment and electric charging stations are now included as credit-eligible property if requirements are met.
It also quintuples the credit amount for any depreciable qualified alternative fuel vehicle refueling property that is part of a refueling project that begins within a specified time period and meets wage and apprenticeship requirements. To qualify, alternative fuel refueling property must be placed in service in a low-income community or in a nonurban area.
[Download the Inflation Reduction Act Roadmap for a full explanation of corporate tax credits.]
This OnPoint report addresses the sourcing requirements for the Inflation Reduction Act’s “clean vehicle credit” and the surrounding proposed regulations as issued by Treasury and the IRS.
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